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Weekend Reading: Markets Love Central Banks - No Matter What They Do

I discussed yesterday, the apparent “myth” of the Fed’s proposed “balance sheet reduction” program as the most recent analysis shows a $13.5 billion “reinvestment” into their balance sheet which has helped fuel the recent market advance.

But therein lies the potential “fatal flaw” of the “bullish logic.”

At the September FOMC meeting, the Federal Reserve announced their latest decision which contained two primary components:

No rate hike currently, although, further rate hikes are likely in the future, and;

The beginning of the process to cease reinvestment of the Fed’s balance sheet.

That announcement was notable for two reasons:

The Fed did NOT hike rates because the underlying economic data, and, in particular, the inflation data, suggests the economy is too weak to absorb a further increase currently, and;

The unwinding of the balance sheet is generally believed to be bullish for stocks.

So, despite the clear evidence of the support for the markets provided by near zero-interest rate policy and trillions in monetary injection, it is believed that “unwinding” those supports will have “no effect” on the market. In other words, it doesn’t matter what the Fed does, it’s “bullish.”

The same is also believed to be the case for the European Central Bank and Mario Draghi who just announced yesterday that the ECB’s QE program will begin to be reduced by €30 Billion per month (down from €60 Billion).While this will continue the expansion of their balance sheet currently, the end of “QE,” as the markets have come to know it, is coming to an end.

Don’t misunderstand me, Central Banks are still very actively engaged in the support of the financial markets for the time being which keeps asset prices positively buoyed. However, with Central Banks now “tightening” monetary policy, the risk of a policy error has risen markedly. This is particularly the case when the financial markets insist on ignoring the knock-off effects of less liquidity.

Tax Reform With Complete Disregard

Yesterday, the House of Representatives passed the Senate-approved budget. This budget is an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt.

Make no mistake – this is a defining moment for the Republican party. After years of passing balanced budgets and calling for fiscal responsibility, the GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform and failing to act on the pressing need to reform our largest entitlement programs.”

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.

As the CFRB concludes:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points.And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”